Five major international banks pleaded guilty to conspiring to manipulate the price of certain foreign exchange transactions, and agreed to pay fines to the United States in excess of US $2.7 billion, as well as other sanctions, to resolve criminal proceedings initiated by the US Department of Justice. The banks, and the individual amounts of their fines are Barclays PLC (US $550 million), Citicorp (US $925 million), JPMorgan Chase & Co. (US $650 million), The Royal Bank of Scotland plc (US $395 million) and UBS AG. UBS agreed to pay an overall criminal fine of US $203 million because its forex activities were also charged as a violation of a December 2012 non-prosecution agreement with the DOJ related to its investigation into UBS’s alleged scheme to manipulate the London Interbank Offered Rate and other benchmark interest rates. Barclays agreed to pay an additional US $60 million for violating a similar June 2012 non-prosecution agreement. In general, the DOJ claimed that, each of the five banks, at various times from December 2007 through January 2013, endeavored to help artificially impact the daily “fix” or settlement price of certain forex paired transactions for their own or other banks’ betterment and/or included markups or markdowns on trades without their clients’ consent. Most of the illicit activity occurred in electronic chat rooms with traders often using, what in retrospect, were incriminating phrases and references. As part of their plea agreements, each of the five banks were required to enter into an express disclosure notice to be sent to all customers and counterparties in which they admitted to the nature of their offenses and to take certain remedial measures to strengthen their internal controls. Separately, the five banks also resolved investigations by the Board of Governors of the US Federal Reserve System for fines in excess of US $1.6 billion related to the same essential conduct (Bank of America settled with the Fed for payment of a fine of US $205 million and other sanctions too), while Barclays additionally settled related civil charges by the Commodity Futures Trading Commission, the New York State Department of Financial Services and the United Kingdom’s Financial Conduct Authority for penalties exceeding US $1.3 billion. Aggregating penalties previously assessed by the Office of the Comptroller of the Currency and the Swiss Financial Market Supervisory Authority, the five banks will pay almost US $9 billion for their allegedly illicit activity in connection with forex transactions. Under its NYSDFS settlement, Barclays was also required “to take all steps necessary” to terminate four employees who were only named by title. Separately, Barclays also agreed to pay a fine of US $115 million to the CFTC related to its alleged manipulative conduct in connection with the US dollar iteration of the International Swaps and Derivatives Association daily fix rates from at least January 2007 through June 2012.
Culture and Ethics: It can only be hoped that these settlements of alleged acts of forex manipulation provide the last revelations of major inappropriate conduct by financial service industry companies and their employees. Unfortunately, this may not be the case, as there appear to be continuing investigations into electronic trading of forex and forex-related products as well as the price-setting process for gold, silver, platinum and palladium. Hopefully, though, financial service firms have minimized the likelihood of future incidents of such illicit behavior by not only implementing better internal controls to prevent and detect such potential issues earlier, but by enhancing overall compliance cultures. This can be encouraged through enacting compensation schemes that better reward and penalize good and bad behavior (not only by line employees, but by their direct and indirect supervisors as well), and by repeatedly educating employees not only about their legal requirements, but also about their ethical obligations too. (Keep in mind the “grandma test:” don’t engage in conduct you would not be proud for your grandmother to read about in her morning tabloid.) It’s not just about avoiding the line between black and white, but about staying out of the zone surrounding such lines altogether. For sure, implementation of better internal controls is critical to prevent and detect potential violations. However, such controls cannot solely be reliant on quantitative analysis and metrics. Such controls must include the intuitive analysis of trained and seasoned professionals who can piece together different metrics and detect issues through application of the “smell test” as well as through application of complex formulas!